Tradable and Non-Tradable Goods
There is a further point, which is that clear differentiation has to be made between tradable and non-tradable goods. PPP may not hold for non-tradable goods such as services. The dry world of economics is frequently best explained through example and anecdote. Thus, a haircut might be cheaper in New York than London (most things [...]
Reasons for “Misalignments”
Exchange rates which do not reflect the PPP value are said to be “misaligned” and it is assumed therefore that they have to revert towards PPP. Such misalignments are seen as being caused by temporary distortions, either to the price of the good or the exchange rate, which should quickly be eliminated by a rational, [...]